Innovation Companies Report Solid Sales Growth: SVB Analytics Quarterly Trends Report

 
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 While the overall economy continued to slow in Q2 of this year, the VC-backed sectors of the economy performed well. Silicon Valley Bank’s Analytics unit studied the financial statements of its privately-held software, hardware, life sciences and cleantech borrowers using its Benchmarking tool and found a more hopeful outlook for these companies than the macroeconomic environment would suggest.

Notable findings of the second quarter report include:

The Social Media segment is improving its long-term business viability 

• The social media segment in particular had ramped up its operations in 2010, in anticipation of potential IPOs and other liquidity events. With the change in investor sentiment, this segment changed its long-term outlook in Q2 2011. Year-over-year expenses in this segment grew 7.7% faster than sales. However, with the weakening economy and the attendant sell-off of in the equity markets in both Q1 and Q2 this year, the growth rate from Q1 to Q2 in the social media segment expenses has been cut to slightly less than its sales growth rate, boding well (or at least better) for its long-term outlook.
• The private software sector showed strong evidence of sustainable operations, with more liquidity and increased cash on hand. It reported solid sales growth both quarter-over-quarter (Q1 to Q2 2011) and year-over-year (Q2 2010 to Q2 2011). It also increased its operating expenses to staff up sales, marketing and administrative functions, suggesting it continues to expect to grow at least through year end. While operating margins remain negative for many of segments in this sector, they managed to improve their margins (reduce their losses) over the last year, again suggesting they are positioning themselves more strongly for the long term.

The Hardware segment remained flush with cash 

• All segments of the hardware sector experienced respectable quarter-over-quarter and strong year-over-year sales growth. The semiconductor sector led the pack with a 26% sales growth increase year-over-year. Cash and equivalents for each hardware segment increased in Q2, and over the past year have increased or held steady. We read this to mean that funding continues to be available to companies in these segments, and they are prepared to weather a turbulent market over the next several years.
• For the Data Communications, Telecommunications and Wireless segments, however, operating expenses grew at a faster rate than sales from Q2 2010 to Q2 2011, suggesting a potential for weakness over the long term.  

The Life Science segment increased cash on hand 

• The Medical Device and Biopharma segments showed strong sales growth relative to expense growth, from both a quarter-over-quarter and year-over-year perspective, indicating a strong outlook for their long-term viability. With substantial increases on the order of 40% — in cash and equivalents over the prior year, it is clear that funding is available for the companies that are meeting their milestones.

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